Can El Paso South Pipeline Save Waha from Negative Outright Pricing?

In August 2021, a deadly explosion on the El Paso Pipeline’s Line 2000 (South Line) reduced westbound takeaway capacity serving the Permian basin by approximately 640 MMcf/d. As Permian natural gas production is predominantly driven by oil prices and producers are generally less willing to invest in significant gas pipeline infrastructure, the basin is routinely constrained by natural gas pipeline infrastructure. Permian natural gas pipelines flowing westward were highly utilized even before Line 2000 was shut, forcing Permian gas to find less economic routes after the accident. As such, Waha pricing struggled even more due to the Line 2000 outage, with the daily basis in early January 2023 blowing out as far as ($7.42)/MMBtu. With Line 2000 returning to service on February 15, 2023, today’s Energy Market Insight will focus on whether Line 2000’s capacity contribution can be enough to sustain the recent tightening of Waha basis through the end of 2023.

The return to service on Line 2000 brought long-awaited relief for midstream infrastructure in the Permian. News of an imminent restart began to percolate when Kinder Morgan declared on their January 18^th 4Q22 earnings call that repairs would be completed by the end of the month and that they would thereafter request permission from the Pipeline and Hazardous Materials Safety Administration (PHMSA) to return to commercial service. Confirmation of the restart came late in the day on February 6, when PHMSA officially lifted Line 2000 pressure restrictions. Waha futures jumped at each step in the process, as shown in the chart below.

The response of Waha basis following Line 2000’s return to service represented the temporary abatement of downward pressure that has plagued natural gas pricing in the region. During the week of the February 15^th restart, basis tightened from ($1.02)/MMBtu on Monday, February 13^th to ($0.32)/MMBtu by Friday, February 17^th. Forward curves appear to promise basis tightening to around the cost of transport by the start of 2024, just as expanded capacity from Permian Highway and Whistler are expected to come online. As of March 6^th, El Paso South flows had increased by 640 MMcf/d, representing a full return of pipeline flows to pre-curtailment levels, and the Waha spot price sat at ($0.50)/MMBtu.

The return of El Paso capacity and the tightening of basis illustrates the typical relationship between utilization rates and basis: when midstream utilization rates increase, basis faces downward pressure (and vice versa). However, beyond the current spot price, the Waha forward curve may not paint an accurate picture of production growth in its characterization of pricing trends over the summer. The shaded area in the graph above indicates a period of inversion in the expected relationship, where BTU Analytics models utilizations to rise and the Waha strip gradually tightens month over month instead. It’s important to note here that this is not what BTU Analytics models for Waha basis, as utilization rates beyond 100% are forecasted to drive a weakening in Waha basis as early as June 2023.

Despite the return of El Paso’s Line 2000, production growth cannot be discounted as a key driver of pricing. With takeaway capacity expected to remain unchanged until expansions arrive in September, and with Permian takeaway utilization expected to approach 100% over the summer, the return of negative outright Waha prices looms as a possibility in the near future. Such an environment could present forward-thinking producers with an opportunity to benefit from hedging Waha basis before it begins to widen this summer. For access to pricing forecasts and analysis of dynamics in Waha and other key U.S. natural gas markets, subscribe to BTU Analytics’ Gas Basis Outlook.

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

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